Bad connectivity

Nokia: Nokia’s new warning spells double trouble. Shares in the Finnish handset maker fell 18 per cent on May 31 as investors took fright at its latest profit warning. The group, worth more than 100 billion euros in late 2007, is valued at barely euro 20 billion.

The direct cause of the latest slide was fresh evidence about the seriousness of the deterioration in Nokia’s handset business. Sales have fallen below management expectations, and operating profit margins are shy of the previously outlined target of 6 per cent to 9 per cent. The unit might now do no more than break even. Still more worrying was Nokia’s decision to scrap targets for handset sales and margins altogether.

Credit, perhaps, is due to Nokia for leaving the market in no doubt about the fogginess of the outlook. But the savage destruction of market value cannot be explained solely with reference to the current operational difficulties.

It must also have a lot to do with investors’ scepticism towards Nokia's strategy to escape the mire via a smartphone partnership with US software giant Microsoft.

After all, it is unsurprising that sales and profits are weak from Nokia’s legacy handset business. With the new Microsoft platform approaching, retailers and network operators have little incentive to push the older range. Customers are hardly likely to rush for soon-to-be-outdated kit either. Had Nokia convinced the market that it could rebuild its franchise through the Windows phone, investors would have taken the bad news in their stride.

It’s easy to see why Nokia is struggling to convince. Apple’s iPhone has a stranglehold on the top end of the smartphone market. Nokia must also compete with devices powered by the Android operating system — as well as with rival handset makers that have had a head start in trying to build a market for Windows-based devices.

Stephen Elop, Nokia’s new chief executive, reckons Windows-powered Nokia handsets will be available in the fourth quarter. That means a few more months of Nokia being beaten up. There's still the risk of further slippages, which could impact on critically important end-of-year holiday sales.

And to the extent that Nokia ends up posing a threat in smartphones, the competition may simply respond by cutting prices. Nokia’s stock will suffer a big discount until the uncertainty lifts.